JAPAN

Photo by: mmette

Nippon

COUNTRY OVERVIEW

LOCATION AND SIZE.

Japan, an island nation in east Asia, is an archipelago (large group of
islands) located east of the Korean peninsula. It has an area of 377,835
square kilometers (145,882 square miles), which makes it slightly
smaller than the state of California. Japan is bordered by the Pacific
Ocean on the north and east, by the Philippine Sea and the East China
Sea to the south, and by the Sea of Japan / East Sea on the west. It has
a coastline of 29,751 kilometers (18,487 miles). Japan's major
cities, including Tokyo, its capital, and Yokohama, its major port, are
located in the southeastern part of the country, on the main island of
Honshu. Kyoto, Nagoya, and Osaka are in the southern part of Honshu.
Sapporo is located on the northern island of Hokkaido. The other 2 main
islands in the Japanese archipelago are Kyushu and Shikoku, to the
southwest.

POPULATION.

Japan's population was estimated at 126,549,976 in July 2000. The
population grew from 115,000,000 in 1975 to 126,300,000 in 1998,
indicating a growth rate of 0.5 percent. With Japan in a state of near
zero population growth, this total is expected to decline to 126,000,000
by 2015. In 2000, the estimated birth rate was 9.96 per 1,000
population, and the estimated death rate was 8.15 per 1,000. In the same
year, the net migration rate was 0 percent.

The Japanese population is very old. According to the 2000 estimation,
17 percent of the population is 65 years old and over, a proportion that
is expected to rise to 24.6 percent by 2015. In 2000, 15 percent of the
population was under 14, and 68 percent was between 15 and 64.

Japan's population is very homogenous, with ethnic Japanese
constituting 99.4 percent of the total. Ethnic minorities, which account
for 0.6 percent of the total population, include about 24,000 indigenous
Ainu people in Hokkaido and about 690,000 Koreans, mostly citizens of
North or South Korea. There are much smaller groups of Chinese and
Caucasians.

The population is highly urbanized, with about 78.5 percent of the
population living in urban areas in 1998, a very small increase from
1975, when they accounted for 75.7 percent. The urban population is
expected to increase to 82 percent by 2015. Based on 1999 statistics,
Tokyo, the capital, is the largest urban center, with a population of
8,049,000. Other major urban areas are Yokohama (3,393,000), Osaka
(2,594,000), Nagoya (2,167,000), Sapporo (1,811,000), and Kyoto
(1,460,000).

TAXATION.

Japan has a relatively complicated tax system. There are a variety of
tax rates for corporations depending on their size, revenue, and
location, and for individuals based on their income, location, and
personal status. In 1999, tax rates ranged between 5 percent and 30
percent. Tax rates for Japanese and foreign corporations are the same.
Foreign corporations operating in Japan are only liable for their income
generated in that country. There are various tax breaks for businesses
to stimulate economic activities. Corporate taxes accounted for 40.87
percent of total collected taxes in 1999, while other taxes, including
personal
income taxes
and
indirect taxes
, accounted for the rest.

Taxes and stamp revenues form the bulk of government revenues (92.6
percent in 1999). Non-tax revenues (e.g., tariffs and various government
fees) account for the remainder of government revenues (7.4 percent in
1999).
Budget deficits
are common, since government expenditures are always much larger than
government revenues. There are 3 major reasons for this: tax rates are
generally low; the aging Japanese population provides limited tax
revenues, especially from the growing retired population, and
consequently requires more government spending on health-care services;
and the government spends large sums to stimulate economic growth. In
the 1999-2000 fiscal year, total government revenues from tax and
non-tax sources were about $446 billion while expenditures were $718
billion. The government finances budget deficits by issuing bonds, equal
to $272 billion in 1999-2000. This reflects a substantial increase in
budget deficit from the fiscal year of 1996-97. The Japanese government
has tried to avoid raising taxes because of the reductions in consumer
purchasing power caused by the economic decline of the 1990s.

The Japanese government's annual issuance of bonds to finance its
deficits has created a huge debt. In 2000, the outstanding government
bonds were estimated at about $3.5 trillion. The government also engages
in off-budget spending (equal to 70 percent of its annual spending)
under its Fiscal Investment and Loan Program (FILP), which funds large
projects such as housing and road building. The source of this spending
is the savings of individuals deposited in the state-run postal savings
system. In 1999, the government paid $174 billion in service charges on
its debt. This is a huge financial burden on the economy, though it has
not yet created a crisis. Still, if the economy does not grow
significantly in the next few years and the debt continues to increase,
the debt burden will have a major negative impact on the Japanese
economy between 2005 and 2010.

AGRICULTURE

Agriculture, including fishery and forestry, is Japan's smallest
economic sector. Its contribution to GDP has decreased substantially
since 1945. It represented 6.1 percent of GDP in the 1970s, but fell to
about 2 percent in 1999. Its share of the workforce has remained stable
since the 1980s; totaling 5 percent (about 3.38 million workers) in
1999.

FARMING.

Production of agricultural products, including rice for domestic
consumption, is declining due to the scarcity of farming land, which
makes large-scale and efficient cultivation rather difficult. High input
costs push up the prices of domestic products, as do restrictions on
production, pricing, and marketing imposed by the government and
agricultural cooperatives. As a result, expensive domestic products are
less attractive to consumers than cheaper imported goods.

As an indicator of its declining economic importance, the growth rate of
agriculture has been mainly negative over the last 2 decades, even with
direct government support, such as heavy tariffs on imported rice (300
percent in 2000). In 1999, the growth rate was 1 percent, a slight
improvement from 1996 and 1998 when the growth rates were-6.8 percent
and-4.5 percent, respectively.

In 1999, total agricultural production was 21,177,737 tons, down from
23,016,800 tons in 1995. Rice production met domestic needs, but total
output fell from 13,435,000 tons in 1995 to 11,468,800 tons in 1999.
Production of potatoes and wheat showed slight increases during this
period.

FORESTRY.

Forests cover about 70 percent of Japan, of which 40 percent are
human-made. Reforestation is a necessity in a land that is endangered by
systematic soil erosion caused by heavy rainfalls. Forestry products
meet only a small portion of domestic needs (about 20 percent in 2000),
while the rest has to be imported, mainly from such sources as the
United States and Indonesia. The value of forestry imports was $5.7
billion in 1999, a sharp
decrease from 1995 when it was $10 billion. Japan's economic
downturn was responsible for this decline.

FISHERIES.

Japan has a large fishing industry. Despite the fact that its large
annual catch accounted for 15 percent of the world's total for
1999, the industry is unable to meet Japan's domestic needs.
Japan is therefore the world's largest importer of fishery
products, consuming 30 percent of such imports in 1996. In 1999,
2,924,000 tons of fishery products were imported, a relatively large
increase from the 1995 levels of 2,803,000 tons. The annual catch in the
post-World War II era, which had always been above 10 million tons
before 1990, dropped to 7.4 million in 1997. This decline is attributed
to several factors, notably coastal-water pollution and disputes over
fishing in international waters.

MANUFACTURING.

Japan has a highly advanced and diversified manufacturing branch that
has been the heart of the Japanese economy in the postwar era. It helped
the Japanese rebuild their shattered industrial sector after the end of
World War II while enabling them to emerge as a global exporter of a
variety of products. It is the reason for the high-value of exports from
Japan ($450 billion in 2000). Manufacturing is the most important reason
for its constant trade surpluses ($95 billion in 2000), despite the poor
performance of the Japanese economy since the early 1990s. Its share of
GDP increased from 24.5 percent in 1995 to 25 percent in 1999,
registering a limited growth. Its share of workforce dropped from 14.6
percent to 13.4 percent in the same period.

The high cost of labor and the high value of the yen encouraged the
relocation of manufacturing to other countries, especially in Southeast
Asia and the Pacific region, since the 1980s. This trend has continued
through 2001. Japan's direct investment abroad increased from
$40.8 billion in 1998 to $66.7 billion in 1999.

Manufacturing consists of light industry (textiles and processed foods),
heavy industry (chemicals, automobiles, shipbuilding, machine tools,
steel, and nonferrous metals) and high-tech industry (electronics,
telecommunications, and computers). Japan is one of the world's
largest and most technologically advanced producers of a wide range of
light and consumer products such as semiconductors and electronic
devices, as well as cars, ships, and steel. Manufacturing includes
small, medium, and large enterprises, of which the first 2 groups
account for the overwhelming majority, 99 percent in 1997.

The 3 largest contributors to exports are industries involved in
high-tech transport equipment and non-electrical machinery. In 1999, the
value of high-tech exports, including computer devices and
semiconductors, was $101.5 billion, a decline from the 1995 figure of
$113.5 billion but a significant increase from 1998, when it was $89.7
billion. The transport-equipment industry had 1999 exports valued at
$94.8 billion, a substantial increase from the 1995 figure of $89.7
billion. Exports of motor vehicles were the largest segment of this
industry, totaling $54.7 billion in 1999, an increase from 1995 and 1998
levels, when they totaled $53.1 billion and $50 billion, respectively.
In 1999, the non-electrical machinery industry exported $89.1 billion in
various products, such as office machinery, a decline from its 1995
exports of $106.5 billion.

A major weakness of the Japanese manufacturing sector is its heavy
dependency on imported raw materials and fuel. For example, its iron and
steel industry needs to import almost all of its iron ore requirements,
which totaled 119.2 million tons in 1996.

CONSTRUCTION.

The construction industry accounted for about 9 percent of
Japan's GDP in 1999, against a 10.8 percent share in 1995. It
employed 9.7 percent of the Japanese workforce (6.57 million workers) in
1999, a small decrease from 1995, when its share was 9.8 percent (6.6
million).

The deflationary policies of the Japanese government since the 1990s had
a negative impact on the construction industry, as demonstrated in a 1.8
percent loss in GDP between 1995 and 1999. Construction projects
declined along with the economy. These economic policies accelerated the
process of relocation of many manufacturing units abroad, resulting in a
decline in large construction projects at home. The Japanese government
has tried to assist this industry by implementing large infrastructural
projects. In 1999, the total value of construction projects was $136.3
billion, a sharp decline from its 1995 level of $206.8 billion.

Many new, major projects after 2000 will help the industry survive until
the economy begins to grow again. There is a $400-billion project by the
Kansai local government to build complexes for commercial, industrial,
and research facilities. There are also 2 multibillion dollar airport
projects: one to construct a second runway at
Kansai International Airport, and another to build a new airport in Ise
Bay; as well as road projects such as the $32-billion Tomei-Meishin
Expressway, connecting Tokyo and Kobe via Nagoya.

MINING.

Japan's lack of adequate minerals and fossil energy (oil, gas,
and coal) forces it to rely extensively on imports. For example,
domestic production of copper ore, lead ore, zinc ore, and iron ore met
only 0.1 percent, 4.8 percent, 2.2 percent, and almost 0 percent of
annual needs in 1999, respectively. This greatly handicaps the Japanese
economy, since this situation makes it highly sensitive to any
interruption of imported supplies. The mining industry makes a very
insignificant contribution to Japan's GDP, 0.2 percent in the
period 1995 to 1999, with about the same contribution to the workforce.

Japan's small mining industry is in decline because of the
depletion of the country's small mineral and fossil energy
resources. The production of copper ore dropped from 6,043,000 tons in
1994 to 1,070,000 tons in 1998. Likewise, lead-ore production fell from
9,946,000 tons in 1994 to 6,198,000 tons in 1998, and coal production
declined from 6,932,000 tons in 1994 to 3,663,000 tons in 1998. Iron-ore
output dropped from 3,000 tons in 1994 to 2,000 tons in 1998, and zinc
from 101,000 to 68,000 tons during the same period.

Japan has no significant energy reserves other than a small deposit of
coal equal to 865 million tons. Most of its major deposits were consumed
in the 1960s during the period of rapid economic growth, at which time
the annual production was about 61 million tons. The existing deposits
are not economically viable because of high labor costs and strict
environmental regulations. In 2000, there were only 2 operating mines
with a total annual production of 3 million tons. These mines operated
with government
subsidies
, and the Japanese government will end these subsidies in 2003. This
will make their continued operation unprofitable, since domestic coal is
priced 3 times higher than imported coal. Domestic production accounted
for only 2.8 percent of supplies in 1998 and 1999, a drastic decrease
from 1960, when it accounted for 86 percent. In 1999, coal imports
totaled 109,263,000 tons, while domestic production totaled 3,286,999
tons. This marked a decline from 1995 levels of 128,978,000 tons and
6,263,000 tons, respectively.

Consuming 5.5 million barrels of oil per day in 1999, Japan is the
world's second largest oil consumer after the United States, but
has practically no oil reserves, as its proven stock is equal to only 59
million barrels. This consumption will likely increase significantly
when the Japanese economy begins to grow again. Japan's oil
consumption has declined since 1996 because of poor economic
performance. In 1999, Japan imported over 228,927,000 tons of crude oil,
while producing only 604,000 tons, a decline from 1996 when their
respective shares were 266,921,000 tons and 861,000 tons.

Japan's natural gas reserves are about 1.4 trillion cubic feet.
Its domestic production is limited, which makes it rely on large imports
of liquefied natural gas (LNG), mostly from Indonesia and Malaysia. In
1999, such imports equaled about 97 percent of its needs and reflected a
200-percent increase from 1991 levels, while domestic production
remained almost the same.

SERVICES

The service sector (financial, retail, tourism, and transportation) has
been growing since the 1970s and now forms Japan's largest
economic sector. In 1999, services accounted for 63 percent of GDP and
65 percent of the workforce (44.07 million workers). Both figures
indicate a significant growth from 1995, when they accounted for 54
percent and 63.2 percent, respectively.

FINANCIAL SERVICES: BANKS.

Japan has one of the world's largest financial sectors, a
necessity for its large economy. Among the most important are banks,
securities companies, the postal savings system, and insurance
companies. Financial services contributed 18.9 percent of GDP in 1999,
an increase from its share of 17.9 percent in 1995. The entire financial
system is highly regulated, making financial activities more difficult
in Japan than in other mature industrial economies. The system is
controlled and regulated by the Ministry of Treasury (formerly known as
the Ministry of Finance), the Bank of Japan, which is the central bank,
the Financial Supervisory Agency (FSA), and the Financial Reconstruction
Commission (FRC). The Japanese financial system includes other
institutions such as venture-capital firms, financial leasing, and
asset-management firms.

Despite the deregulating reforms of the Japanese government since the
1990s, the financial system is still extensively regulated. Of these,
the "Big Bang" reform has been the most comprehensive one.
Launched in 1996, it was aimed at liberalizing the financial system to
address the demand of domestic institutions for the removal of various
government restrictions and also to open the financial sector to foreign
competition. A new governmental entity, the Financial Supervisory
Agency, was created to oversee the reforms. A major beneficiary has been
foreign financial institutions, which are now faced with less
restrictive regulations, and can extend their operations in areas
previously closed to them, such as the mutual-fund business. They can
also engage in alliances with Japanese firms or take them over. In 2000,
for instance, Ripplewood Holdings, an American firm, took over the
Long-Term Credit Bank of Japan.

Based on 1999 statistics, the Japanese banking system consists of 9 city
banks, 1 long-term credit bank, 7 trust banks, 121 regional banks, 396
credit associations, and 322 credit cooperatives, with total assets
valued at $6.74 trillion. City banks are large financial institutions
that provide nationwide services while having extensive operations
abroad. The largest of these have their headquarters in major cities
such as Tokyo, Osaka, and Nagoya, where their principal activity is in
serving large corporations, though they are gradually undertaking other
types of activities including serving small corporations. Smaller
regional banks, with total assets of $1.7 trillion in 2001, operate
mainly in a particular region and provide services to small and
medium-size companies. Credit banks, with 2000 assets valued at $570
billion, supply long-term industrial capital to large and small firms.
Except for the Industrial Bank of Japan, all credit banks collapsed in
the late 1990s. Credit associations, with estimated assets of $900
billion in 2000, function like credit unions in that they receive
deposits from the general public and lend only to their members. Credit
cooperatives, which provide financing to small- and medium-size
businesses in urban areas, had assets of $172 billion in 2000. Like the
credit associations, they receive deposits from, and lend to, their
members only.

The Japanese banking system also includes public banks, such as the
Development Bank of Japan (DBJ), the Japan Bank for International
Cooperation (JBIC), and the National Life Finance Corporation (NLFC).
Their mandate is to supplement the activities of commercial banks. The
JBIC is mainly involved in international financial operations such as
export/import and overseas investment loans. The DBJ provides Japanese
and foreign companies operating in Japan with services such as long-term
financing. The NLFC provides financial assistance to small businesses
such as retailers, restaurants, and small construction companies.

There are also 89 foreign banks in Japan, of which 14 are American, 30
Asian, and 35 European. Owing to the financial reforms of the late
1990s, these banks can be involved in all types of banking operations,
such as retail and investment banking and international business. They
are also permitted to have branches and provide services to large
corporations. As a matter of practice, they provide services mostly to
foreign firms and
joint ventures
, while offering banking services to individuals.

OTHER FINANCIAL SERVICES.

Securities companies, which are active in investment services, have the
combined role of underwriters, dealers, and brokers. In 2000, there were
291 securities companies, of which the 3 largest—Nomura
Securities, Daiwa Securities, and Nikko Securities—controlled
most of the industry. Some 59 are foreign companies, such as 2 American
giants, Merrill Lynch and Salomon Smith Barney.

With assets valued at $2.27 trillion in 1999, the Japanese postal
savings system is the world's largest. It consists of about
24,000 post office branches that accept savings deposits and offer
insurance activities and annuities. The system provides an inexpensive
source of funds for government projects.

As part of Japan's financial system, the insurance industry has
reformed many of its restricted activities since the late 1990s, such as
non-life premiums. The industry consists of 46 life and 34 non-life
insurance companies with total assets of $1.9 trillion, making it the
world's largest insurance industry. Foreign insurance companies
are small (44 life and non-life companies), but they are growing. Joint
ventures between foreign and domestic firms are also increasing.

RETAIL.

The Japanese retail industry is very large, consisting of a wide range
of retailers capable of distributing goods and services throughout the
country. In 1999, its share of GDP was 14.4 percent, an increase from
its 12.7 percent share in 1995. The industry includes restaurants of
various sizes, which also includes franchised restaurants of Japanese
and foreign origin. Most retail stores are small (less than 500 square
meters), although there are large supermarkets and department stores.
High land prices and various regulations restrict the number of large
stores, while regulatory laws seeking to protect small businesses from
competition create a major barrier to the expansion of large stores.
Regulations such as those limiting store space and business hours have
contributed to high retail prices, though these have recently been
relaxed to some extent. Laws also discourage the establishment of
discount retailers and shopping malls.

The distribution system in Japan is complex, tightly controlled, and
labor-intensive, making the sector difficult for foreign retailers to
enter. As a rule, imported products are usually sold at large stores,
department stores, and discount stores, while about half of all consumer
purchases are made at small neighborhood stores with fewer than 5
employees.

TOURISM.

Japan has a very large and well-developed tourist industry, which
generated $4.3 billion in 1997. It provides an insignificant
contribution to GDP, equal to 0.1 percent in 1997, no change from its
share in 1993. The country's mild temperatures and long
coastlines, together with its numerous historical sites, make the
country an attractive destination. Foreign tourists mostly visit Tokyo
and Kyoto on the main island of Honshu, while domestic tourists are also
attracted to the northern island of Hokkaido and the southern islands of
Okinawa, Miyako, and Ishigaki. Still, only 4.2 million tourists visited
Japan in 1997, a significant increase of 24 percent from 1993, but still
far below other Asia-Pacific tourist destinations, such as the 9 million
who visited Hong
Kong in 1997, bringing $9 billion in revenues. This is mainly due to
the high cost of living in Japan, one of the highest among the
industrialized economies, and to its remote location. Events such as the
2002 soccer World Cup, which will be co-hosted by Japan and South Korea,
will uplift the Japanese tourist industry. If successful, Japan's
efforts to host the 2008 Olympics in Osaka will be a major boost for its
tourist industry. In anticipation of an increase in tourism, many hotel
projects are underway all over the country, including a 780-room
Marriott hotel in Nagoya.